In: Finance
Using the table of probabilities and returns for a stock mutual fund, what is the mutual fund's expected return?
State |
Probability |
Return |
Depression |
0.05 |
-20% |
Recession |
0.25 |
-5% |
Normal |
0.5 |
8% |
Boom |
0.2 |
30% |
Multiple Choice
9.15%
10.25%
7.75%
8.00%
Expected return=Respective return*Respective probability
=(0.05*-20)+(0.25*-5)+(0.5*8)+(0.2*30)
which is equal to
=7.75%